UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended March 31, 2009




OR




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from ________ to _________




Commission
file number 000-49636







VIKING
SYSTEMS, INC.


(Exact
name of registrant as specified in its charter)




Delaware
            
            86-0913802(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)





134
Flanders Road, Westborough, MA 01581


(Address
of principal executive offices) (Zip Code)




(508)
366-3668


(Registrant’s
telephone number, including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.   YES xNO  ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). YES  ̈NO o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large
      accelerated filer    ̈
            
            Accelerated
      filer    ̈Non-accelerated
      filer (Do not check if a smaller reporting company) ̈
            
            Smaller
      reporting company   x




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).   YES  ̈NO x




The
registrant had 42,715,110 shares of common stock, $0.001 par value per share,
outstanding as of April 30, 2009.









FORM
10-Q





FINANCIAL
STATEMENTS AND SCHEDULES


VIKING
SYSTEMS, INC.





For
the Quarter ended March 31, 2009





PART I - FINANCIAL
INFORMATION





Form
      10-QItem
      1.
            Financial
      Statements (unaudited):Balance
      Sheets at  March 31, 2009 and December 31, 2008
            2Statements
      of Operations for the Three  Months Ended March 31, 2009 and
      2008
            3Statements
      of Cash Flows for the Three Months Ended March 31, 2009 and
      2008
            4-5Notes
      to Financial Statements
            6-9Item
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            10-13Item
      3
            Quantitative
      and Qualitative Disclosure About Market Risk
            13Item
      4T.
            Controls
      and Procedures
            13-14




PART II - OTHER
INFORMATION




Item
      1.
            Legal
      Proceedings
            15Item
      1A.
            Risk
      Factors
            15-18Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            18Item
      3.
            Defaults
      Upon Senior Securities
            18Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            18Item
      5.
            Other
      Information
            18Item
      6.
            Exhibits
            19-20




1


PART
I - FINANCIAL INFORMATION





ITEM
1.   FINANCIAL STATEMENTS


VIKING
SYSTEMS, INC.


Balance
Sheets - Unaudited




March
      31,
            
            
            December
      31,Assets
            
            2009
            
            
            2008Current
      assets:Cash
      and cash equivalents
            
            $
            446,186
            
            
            $
            168,767Accounts
      receivable, net
            
            
            715,087
            
            
            
            837,229Inventories
            
            
            1,848,003
            
            
            
            2,104,764Prepaid
      expenses
            
            
            25,735
            
            
            
            151,048Total
      current assets
            
            
            3,035,011
            
            
            
            3,261,808Property
      and equipment, net
            
            
            145,582
            
            
            
            223,609Intangible
      assets, net
            
            
            192,500
            
            
            
            210,000Total
      assets
            
            $
            3,373,093
            
            
            $
            3,695,417Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
            
            $
            1,282,417
            
            
            $
            1,432,460Accrued
      liabilities
            
            
            758,518
            
            
            
            794,219Deferred
      revenue
            
            
            98,243
            
            
            
            51,254Capital
      lease obligations – current
            
            
            21,003
            
            
            
            31,821Total
      current liabilities
            
            
            2,160,181
            
            
            
            2,309,754Commitments
      and contingenciesPreferred
      Stock, 25,000,000 shares authorizedSeries
      B redeemable preferred stock, $0.001 par value; 0 shares outstanding at
      March 31, 2009 and December 31, 2008
            
            
            -
            
            
            
            -Stockholders’
      Equity:Common
      stock, $0.001 par value, 400,000,000 shares authorized; and 42,715,110
      issued and outstanding at March 31, 2009 and  December 31,
      2008
            
            
            42,715
            
            
            
            42,715Additional
      paid-in capital
            
            
            26,684,368
            
            
            
            26,566,607Accumulated
      deficit
            
            
            (25,514,171
            )
            
            
            (25,223,659
            )Total
      stockholders' equity
            
            
            1,212,912
            
            
            
            1,385,663Total
      liabilities and stockholders' equity
            
            $
            3,373,093
            
            
            $
            3,695,417






The
accompanying notes are an integral part of the interim financial
statements.




2


VIKING
SYSTEMS, INC.


Statements
of Operations -Unaudited




Three
      Months Ended
              March
      31,2009
            
            
            2008Sales,
      net
            
            $
            1,521,228
            
            
            $
            1,396,917Cost
      of sales
            
            
            1,146,932
            
            
            
            1,235,560Gross
      profit
            
            
            374,296
            
            
            
            161,357Operating
      expenses:Selling
      and marketing
            
            
            230,895
            
            
            
            390,823Research
      and development
            
            
            147,721
            
            
            
            237,508General
      and administrative
            
            
            403,027
            
            
            
            1,383,892Total
      operating expenses
            
            
            781,643
            
            
            
            2,012,223Operating
      loss
            
            
            (407,347
            )
            
            
            (1,850,866
            )Other
      income (expense):Interest
      income
            
            
            510
            
            
            
            15,237License
      fee
            
            
            115,000
            
            
            
            -Other
      income
            
            
            2,060
            
            
            
            270,873Interest
      expense
            
            
            (735
            )
            
            
            -Loss
      on recapitalization transaction
            
            
            -
            
            
            
            (2,703,776
            )Gain
      on derivative liability
            
            
            -
            
            
            
            307,061Total
      other income (expense)
            
            
            116,835
            
            
            
            (2,110,605
            )Net
      loss
            
            $
            (290,512
            )
            
            $
            (3,961,471
            )Net
      loss per share - basic and diluted
            
            $
            (0.01
            )
            
            $
            (0.10
            )Weighted
      average shares outstanding - basic and diluted
            
            
            42,715,110
            
            
            
            41,199,755






The
accompanying notes are an integral part of the interim financial
statements.





3


VIKING
SYSTEMS, INC.


Statements
of Cash Flows-Unaudited


Three Months Ended
              March
      31,2009
            
            
            2008Cash
      flows from operating activities:Net
      loss
            
            $
            (290,512
            )
            
            $
            (3,961,471
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            91,494
            
            
            
            131,512Stock
      based compensation expense
            
            
            117,761
            
            
            
            724,791Gain
      on derivative liability
            
            
            -
            
            
            
            (307,061
            )Loss
      on recapitalization transaction
            
            
            -
            
            
            
            2,703,776Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            122,142
            
            
            
            606,161Inventories,
      net
            
            
            260,794
            
            
            
            (243,495
            )Prepaid
      expenses
            
            
            125,313
            
            
            
            (75,371
            )Other
      current assets
            
            
            -
            
            
            
            40,301Accounts
      payable
            
            
            (150,043
            )
            
            
            (704,162
            )Accrued
      expenses
            
            
            (35,701
            )
            
            
            (352,531
            )Deferred
      revenue
            
            
            46,989
            
            
            
            (147,845
            )Net
      cash provided by (used in) operating activities
            
            
            288,237
            
            
            
            (1,585,395
            )Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            -
            
            
            
            (18,331
            )Net
      cash used in investing activities
            
            
            
            
            
            
            (18,331
            )





Cash
      flows from financing activities:Net proceeds from issuance of common
      stock
            
            
            -
            
            
            
            2,589,905Repayment
      of capital lease obligations
            
            
            (10,818
            )
            
            
            (10,273
            )Net
      cash (used in) provided by financing activities
            
            
            (10,818
            )
            
            
            2,579,632Net
      change in cash and cash equivalents
            
            
            277,419
            
            
            
            975,906Cash
      and cash equivalents at beginning of period
            
            
            168,767
            
            
            
            317,098Cash
      and cash equivalents at end of period
            
            $
            446,186
            
            
            $
            1,293,004Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
            
            $
            735
            
            
            $
            1,767Income
      taxes
            
            $
            
            
            
            $
            -






The
accompanying notes are an integral part of the interim financial
statements.





4


VIKING
SYSTEMS, INC.


Statements of Cash Flows-Unaudited
 (continued)




Non-cash,
investing and financing activities:





There
were no non-cash investing and financing activities during the three months
ended March 31, 2009.





During
the three months ended March 31, 2008, the Company:




●
            Issued
      22,400,020 shares of common stock in exchange for all outstanding
      convertible debentures and related accrued interest and liquidated
      damages.





●
            Issued
      4,197,849 shares of common stock in exchange for all outstanding Preferred
      Stock and related accrued dividends, interest on unpaid dividends and
      liquidated damages.





●
            Issued
      warrants to purchase 11,200,011 shares of the Company’s common stock to
      the former convertible debenture holders in exchange for their then
      outstanding warrants to purchase 443,141 shares of common
      stock.





●
            Issued
      warrants to purchase 2,098,027 shares of the Company’s common stock to the
      former Preferred Stockholders in exchange for their then outstanding
      warrants to purchase 666,667 shares of common
  stock.








The
accompanying notes are an integral part of the interim financial
statements.





5





1.           INTERIM
FINANCIAL STATEMENTS





The
balance sheet of Viking Systems, Inc. (“Viking” or the “Company”) as
of March 31, 2009 and the statements of operations and cash flows for the
three month periods ended March 31, 2009 and 2008 are unaudited. However,
management, in its opinion, has made all adjustments necessary
to ensure that the information presented not misleading. The balance sheet
as of December 31, 2008 was derived from the Company's audited financial
statements. The financial statements and notes thereto should be read in
conjunction with the financial statements and notes for the years ended
December 31, 2008, included in Viking's annual report on Form 10-K for the
year ended December 31, 2008,  which was filed on April 15, 2009 with
the Securities and Exchange Commission. The results of operations and cash flows
for the three month periods ended March 31, 2009 are not necessarily indicative
of results to be expected for the fiscal year ending December 31,
2009.





2.           LIQUIDITY





The
accompanying financial statements have been prepared on a going concern basis,
which contemplates, among other things, the realization of assets and the
satisfaction of liabilities in the ordinary course of
business.  During the three months ended March 31, 2009, we incurred a
net loss of $290,512.  For the year ended December 31, 2008, the
Company recorded a net loss of $5,752,057 and cash used in operating activities
was $2,615,399.  As of March 31, 2009, the Company had $446,186 of
cash and cash equivalents and a net working capital balance of
$874,830.





Management
believes that the Company’s existing cash resources, combined with projected
cash flows from operations are not likely to be sufficient to execute its
business plan and continue operations for the next twelve
months.  Management has taken steps to reduce the Company’s operating
expenses, and continues to implement changes in its strategic direction aimed at
achieving profitability and positive cash flow.    In addition,
management continues to explore various strategic alternatives, including
business combinations, private placements of debt or equity securities and
strategic licensing or other arrangements.  In this regard, in August
2008, the Company entered into a technology licensing arrangement pursuant to
which we received proceeds of $1.0 million.    In November
2008, the Company engaged an investment banking firm to assist management in
exploring business combinations and/or raising additional
capital.  This process is ongoing. However,  the Company may
not be successful in executing a business combination or in obtaining additional
financing on acceptable terms, on a timely basis, or at all, in which case, the
Company may be forced to make further cut backs, or cease
operations.  The financial statements do not include any adjustments
that might be necessary should the Company be unable to continue as a going
concern




3.           LOSS
PER SHARE





The
computation of basic and diluted loss per common share is computed using the
weighted average number of common shares outstanding during the
year.





Due to
the net losses for the three month periods ended March 31, 2009 and March 31,
2008, potentially dilutive securities have been excluded in the calculation of
diluted loss per share because their inclusion would be anti-dilutive.
Accordingly, basic and diluted loss per share are the same within each
respective period.




The
following potentially dilutive common shares were excluded from the calculation
of diluted net loss per common share because their effect was antidilutive for
the periods presented:




Three
      Months Ended March 31,2009
            
            
            2008Warrants
            
            
            27,985,020
            
            
            
            28,047,519Stock
      Options
            
            
            6,354,440
            
            
            
            6,940,840Total
            
            
            34,339,460
            
            
            
            34,988,359




6




4.           INVENTORY




Details
of our inventory account balances are as follows:




March
      31,
                2009
              
              
              December
      31,
                2008Inventories:Parts
      and supplies
              
              $
              1,114,868
              
              
              $
              1,208,720Work-in-progress
              
              
              417,531
              
              
              
              426,779Finished
      goods
              
              
              788,105
              
              
              
              945,816Valuation
      reserve
              
              
              (472,501
              )
              
              
              (476,551
              )$
              1,848,003
              
              
              $
              2,104,764




5.           ACCRUED
LIABILITIES





Accrued
liabilities consist of the following:





March
      31, 2009
            
            
            December
      31,
              2008Employee
      and director compensation
            
            $
            459,090
            
            
            $
            433,371Registration
      delay fees
            
            
            161,574
            
            
            
            161,574Professional
      and consulting fees
            
            
            39,718
            
            
            
            88,918Other
      accrued expenses
            
            
            98,136
            
            
            
            110,356$
            758,518
            
            
            $
            794,219




6.           LICENSE
AGREEMENT





In March
2009, the Company licensed one of its patents to a third party through September
2009.  The license is exclusive and is for use outside the medical
products field.  The third party had previously licensed this patent
through December 2006.  The license fee of $115,000 is included in
other income for the three months ended March 31, 2009 and in accounts
receivable at March 31, 2009.




7.           STOCK-BASED
COMPENSATION





On
January 1, 2006, the Company adopted, using the modified prospective method. In
accordance with Statement of Financial Accounting Standards (“SFAS”) No.123
(Revised 2004), “Share Based Payment,” (“SFAS 123R”), the Company measures the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost is
recognized over the period during which an employee is required to provide
service in exchange for the award - the requisite service period. The Company
determines the grant-date fair value of employee share options using the
Black-Scholes option-pricing model.




During
the three months ended March 31, 2009 and 2008, the Company recorded $117,761
and $724,791 respectively, in non-cash stock-based compensation expense pursuant
to SFAS 123R. As of March 31, 2009, there was approximately $1,008,508 in
total unrecognized compensation costs related to unvested options, which is
expected to be recognized over a weighted average period of approximately 3
years.





No stock
options were granted during the three months ended March 31,
2009.  The fair value of stock options granted during the three months
ended March 31, 2008 was estimated using the Black-Scholes model with the
following assumptions: volatility of 133%, life of 5-7 years, risk-free interest
rate of 3.33%, and expected dividend yield of 0%. Volatility is based on
the historical volatility of the Company's common stock. The life of employee
stock options is based on the average of the vesting period and contractual
life. The risk free interest rate is based on U.S. Treasury constant maturity
rate for the expected life of the stock option.





7


Using the
assumption described above, the 6,865,000 stock options granted during the three
months ended March 31, 2008 were valued at $1,779,528.  Based on
vesting terms, $312,168 of this amount was recognized during the three months
ended March 31, 2008.





The
following table summarizes the stock option transactions during the three months
ended March 31, 2009:





Number
      of
              Shares
            
            
            Weighted
      - Average
              Exercise
      Price
            
            
            Weighted
      -Average Remaining
              Contractual
      Life
              (in
      years)Options
      outstanding December 31, 2008
            
            
            6,354,440
            
            
            $
            0.58
            
            
            
            9.11Granted
            
            
            -
            
            
            $Cancelled
            
            
            -
            
            
            $Options
      outstanding March 31, 2009
            
            
            6,354,440
            
            
            $
            0.58
            
            
            
            8.86Options
      exercisable at March 31, 2009
            
            
            3,067,528
            
            
            $
            0.84
            
            
            
            8.80





During
the quarter ended March 31, 2008, shareholders approved  the Viking
Systems, Inc. 2008 Equity Incentive Plan (the “2008 Equity Plan”), and the
Viking Systems, Inc. 2008 Non-Employee Directors’ Stock Option Plan (the
“Directors’ Plan,” ). The maximum number of shares that may be issued pursuant
to the 2008 Equity Plan is 6,720,000 shares plus such number of shares that are
issuable pursuant to awards outstanding under the 2004 Plan as of the effective
date and which would have otherwise reverted to the share reserve of the 2004
Plan. We have reserved a total of 1,500,000 shares of our common stock for
issuance under the Directors’ Plan.  During the three months ended
March 31, 2008, 6,715,000 shares were issued under the 2008 Equity Plan and
150,000 shares were issued under the Directors’ Plan.




During
the three months ended March 31, 2008, six employees surrendered 79,000
previously issued stock options. As a result, the total amount of shares
issuable under 2008 Equity Plan increased by 79,000.   In
connection with the surrender of stock options, during three months ended March
31, 2008 the Company recognized the remaining non-cash stock option compensation
of $410,258 related to these stock options.




8.           WARRANTS
TO PURCHASE COMMON STOCK





The
following table summarizes warrant activity during the three months ended March
31, 2009:


Shares
                  
                  
                  Range
      of
                    Exercise
      Price
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    LifeWarrants
      outstanding December 31, 2008
                  
                  
                  27,985,020
                  
                  
                  $
                  0.18-0.35
                  
                  
                  $
                  0.18
                  
                  
                  
                  4.0Expired
                  
                  
                  -Exercised
                  
                  
                  -Outstanding
      March 31, 2009
                  
                  
                  27,985,020
                  
                  
                  
                  0.18-0.35
                  
                  
                  
                  0.18
                  
                  
                  
                  3.75





8


9.           RECENT
ACCOUNTING PRONOUNCEMENTS





The
following accounting pronouncements were adopted effective January 1,
2009:





In June
2008, the Financial Accounting Standards Board (“FASB”) ratified EITF Issue No.
07-5, “ Determining whether an
Instrument (or Embedded Feature) is indexed to an Entity's Own Stock”
(“EITF 07-5”). EITF 07-5 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, andinterim periods within
those fiscal years. Early application was not permitted. Paragraph 11(a) of SFAS
No. 133 - specifies that a contract thatwould otherwise meet
the definition of a derivative but is both (a) indexed to the Company's own
stock and (b) classified in stockholders' equityin the statement of
financial position would not be considered a derivative financial instrument.
EITF 07-5 provides a new two-step model to beapplied in determining
whether a financial instrument or an embedded feature is indexed to an issuer's
own stock and thus able to qualify for theSFAS No. 133 paragraph
11(a) scope exception. The  adoption of EITF 07-5 effective January 1,
2009 did not have a material impact on the Company’s financial
statements





In
February 2008, the FASB issued FASB Staff  Position (“FSP”) FSP 157-2,
“ Effective Date of FASB
Statement No. 157” (FSP 157-2). FSP 157-2 delayed the effective
date of SFAS 157 for all non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), until the
beginning of the first quarter of fiscal 2009. These include goodwill and other
non-amortizable intangible assets.  The adoption of SFAS 157 with
respect to non-financial assets and liabilities effective January 1, 2009 did
not have a material impact on the Company’s financial statements.





In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing the renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FAS 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 also
requires expanded disclosure related to the determination of intangible asset
useful lives. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008.. The adoption of  FSP FAS
142-3  effective January 1, 2009 did not have a material impact on the
Company’s financial statements.





9


ITEM
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





This
quarterly report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties.  You should not place undue reliance on these
forward-looking statements.  Our actual results could differ materially
from those anticipated in the forward-looking statements for many reasons,
including the risks described in this report and other reports we file with the
Securities and Exchange Commission.  Although we believe the expectations
reflected in the forward-looking statements are reasonable,
they relate only to events as of the date on which the statements are
made.  We do not intend to update any of the forward-looking statements
after the date of this document to conform these statements to actual results or
to changes in our expectations, except as required by law.





The
following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto, and other financial information included
elsewhere in this quarterly report on Form 10-Q.





Overview





We are a
worldwide developer, manufacturer and marketer of visualization solutions for
complex minimally invasive surgery.  We partner with medical device
companies and healthcare facilities to provide surgeons with proprietary
visualization systems enabling minimally invasive surgical procedures, which
reduce patient trauma and recovery time.





We
manufacture two dimensional, or 2D, digital cameras that are sold to third-party
companies who sell to end users through their Original Design Manufacturer , or
ODM, programs and Original Equipment Manufacturer ,OEM, programs.




We sell
our proprietary visualization system, (3Di Vision System) under the Viking
brand directly to hospitals and outpatient surgical centers in the United States
and outside the United States through our distributor network.  We
also sell our CardioCam/MiniCam product through these channels.





Liquidity
and Capital Resources





On
January 4, 2008, we completed execution of a Recapitalization Plan (the
“Recapitalization Plan”).   In November 2007, we received approval,
subject to finalization of certain terms and execution of final documentation,
from 100% of the stockholders of our Series B Variable Dividend Convertible
Preferred Stock (the “Preferred Stock”) and our 8% Secured Convertible
Debentures due February 23, 2009 (the “Debentures”), of the Recapitalization
Plan.  The Recapitalization Plan called for an additional investment
of $2.5 to $3.0 million (the “New Investment”) and a redistribution of our
common stock among the current holders of our common stock, Preferred Stock,
Debentures and the investors providing the New Investment.




In
consummating the Recapitalization Plan, the redistribution of our capital was
accomplished on January 4, 2008 through the following: (i) a 1 for 50 “reverse
split” of our outstanding common stock, (ii) our entry into a Recapitalization
Agreement with the applicable holders, pursuant to which the holders of the
Preferred Stock and Debentures exchanged their respective securities (including
warrants that were issued in connection with the Preferred Stock and the
Debentures) for shares of our common stock and warrants which may be exercised
for common stock; and (iii) our entry into a Securities Purchase Agreement with
those parties making the New Investment of $2.6 million pursuant to which they
were issued shares of our common stock and warrants which may be exercised for
shares of our common stock.   As part of the recapitalization, we
executed a Securities Purchase Agreement and completed a sale of 14,560,037
shares of our common stock for $0.178571 per share, or aggregate consideration
of $2,600,000, of which we received net proceeds of $2,600,000.





In
October 2007, our board of directors approved a revised strategic direction
for our Company.  This strategy included focusing on our ODM/OEM
business while significantly reducing expenses associated with our 3Di Vision
Systems business.  We continued our 3Di Vision Systems business on a
reduced basis by utilizing our independent sales representatives and our
existing distributor network.  The revised strategic direction of
October 2007 enabled us to reduce expenses, primarily associated with the 3Di
Vision Systems business, that are not expected to contribute
to positive cash flow in the near term,  including the elimination of
our U.S. direct sales force and a reduction in related clinical and marketing
expenses.





In
2008, the board of directors re-evaluated this decision in light of our
subsequent experience and considered various modifications to the business
strategy.  The board determined to seek additional investment in our
3Di technology followed by investment in our U.S. distribution
channels.  However, we cannot implement these initiatives until we
either enter into a business combination or raise substantial capital
resources.   In November 2008 we engaged an investment banking firm to
assist our management in exploring business combinations and/or raising
additional capital.  This process continues.





10


Absent a
business combination, we believe that it is likely that we will need to raise
additional capital to execute our business plan and continue our operations for
the next twelve months.   Such financing may not be available on
acceptable terms, or at all. We do not have any arrangements with any bank,
financial institutions or investors to provide additional financing and there
can be no assurance that any such arrangement, if required or otherwise sought,
would be available on terms deemed to be commercially acceptable and in our best
interests. If we fail to secure such financing and we are not generating
positive cash flow, we will consider other options, including curtailing
operations or seeking bankruptcy protection.





Since our
inception, we financed our operations principally through private sales of
equity securities and convertible debt. From January 1, 2004 through
March  31, 2009, we have raised net proceeds of $10,750,000 through
the sale of common and preferred stock in private placements and approximately
$13,600,000 through the issuance of convertible notes and debentures. As of
March 31, 2009, we had cash of  $446,186.





Net cash
provided by operating activities for three months ended March 31, 2009 was
$288,237.  Net cash used in operating activities for the three months
ended March 31, 2008 was $1,585,395. This improvement in  cash flows
from operating activities was attributable primarily to a smaller loss for the
three months ended March 31, 2009 combined with net cash generation during 2009
from the combined changes in inventory, accounts receivable, accounts payable
and accrued expenses compared with  net cash consummation in those
combined changes during the same period in 2008.





Net cash
used in financing activities was $10,818 during the three months ended March 31,
2009 compared with net cash provided by  financing activities of
$2,579,632  during the three months ended March 31, 2008. The net cash
provided by financing activities in 2008 resulted from the sale of common stock
in connection with our Recapitalization Plan. We completed no such financing
activities during the three months ended March 31, 2009.




RESULTS
OF OPERATIONS





Three
Month Period Ended March 31, 2009 Compared with the Three Month Period Ended
March 31, 2008





Sales.  We
had sales of $1,521,228 for the three months ended March 31, 2009 and of
$1,396,917 for the three months ended March 31, 2008, representing an increase
of 9%. The increase in sales during 2009 was due to increased sales in both 3Di
and OEM products and service.  During the quarter ended March 31,
2009, we experienced increase demand and sales of our high definition cameras as
well as our proprietary visualization system designed for and distributed by
Boston Scientific as compared with the first quarter of
2008.  Partially offsetting these increases was a decrease in revenue
recognized associated with a third party development contract for 3D vision
products.





Sales
to individual customers exceeding 10% or more of revenues in the three months
ended March 31, 2009 were to three customers who accounted for 25%, 20% and 16%
of revenues, respectively.





Gross
Profit. Gross profit was $374,296 or 24.5% for the months ended March 31,
2009 and $161,357 or 11.5% for the three months ended March 31, 2008,
representing an increase of  $212,939. The increase in gross
margin percentage is due to a favorable sales mix of higher margin products as
well as higher production volumes resulting in lower per unit manufacturing
costs.





Operating
Expenses.  We incurred operating expenses
of  $781,643 for the three months ended March 31, 2009
and  $2,012,223 for the three months ended March 31,
2008.  For the three months ended March 31, 2009 and 2008, excluding
non-cash stock based compensation expense, total operating expenses were
$663,882 and $1,287,432, respectively.  This decrease
of  $623,550 is due largely due to decreased general and
administrative expense and our continued cost reduction efforts .





Sales and
Marketing Expense. Sales and marketing expenses were $230,895 for the
three months ended March 31, 2009 and $390,823 for the three months ended March
31, 2008.  This decrease of $159,928, or approximately 41% is due to
reductions in our or marketing efforts, reduction in sales related headcount,
and lower depreciation expense related to demonstration equipment.





Research and
Development Expense.  We had research and development expenses
of $147,721 for the three months ended March 31, 2009 and $237,508 for the three
months ended March 31, 2008, representing a decrease of  $89,797. This
decrease occurred primarily due to the reduction of personnel focused on
research and development activities.





General and
Administrative Expense.  General and administrative expenses
include costs for administrative personnel, legal and accounting expenses and
various public company expenses. General and administrative expenses were
$403,027 for the three months ended March 31, 2009 and $1,383,892 for the three
months ended March 31, 2008.  During the three months ended March 31,
2009, we recorded $117,761 related to non-cash stock option compensation expense
compared with $724,791 for the same period in 2008.  Excluding these
charges, general and administrative expense decreased $373,837.  Legal
expense decreased approximately $191,000 as compared with the prior year due to
services associated with the 2008 Recapitalization not repeating in
2009. We also incurred lower audit related expenses in the first quarter of
2009 compared with the same period in 2008. Additionally, we accrued an employee
separation charge of approximately $90,000 during the quarter ended March 31,
2008 that was not repeated in 2009.





11


Other Income and
Expenses.  During the three months ended 2009, other income
and expense totaled to income of $116,835 compared with a net charge of
$2,110,605 for the same period in 2008.  During the first quarter of
2009 we recorded $115,000 of license fee income related to the granting of
a  license to use one of our patents in the nonmedical
markets.  During the first quarter of 2008, we recorded a charge of
$2,703,776 related to the recapitalization transaction.  This charge
was offset by the reversal of approximately $271,000 related to accrued fees
associated with our failure to file a registration statement for common stock
and warrants issued during 2006.  Additionally, during the first
quarter of 2008, we recorded a non-cash gain on derivative liability of $307,061
related to the decrease in value of tour derivative
instruments.





Operating
Loss Before Non-Cash Charges




A
reconciliation of net loss in accordance with U.S. generally accepted accounting
principles (GAAP) to the non-GAAP measure of operating loss before non-cash
charges is as follows:




Three
      Months Ended
              March
      31,2009
            
            
            2008Net
      loss, as reported
            
            $
            (290,512
            )
            
            $
            (3,961,471
            )Adjustments:Total
      other (income)/expense
            
            
            (116,835
            )
            
            
            2,110,605Non-cash
      stock option expense
            
            
            117,161
            
            
            
            724,791Depreciation
      and amortization
            
            
            91,494
            
            
            
            131,512Operating
      loss before non-cash charges
            
            $
            (198,692
            )
            
            $
            (994,563
            )





Use
of Estimates and Critical Accounting Policies





This
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States.





The
preparation of our financial statements requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, management evaluates its estimates and
assumptions, including those related to inventory, income taxes, long lived
asset valuation, revenue recognition, stock-based compensation and derivative
liabilities. Management bases its estimates and judgments on historical
experience of operations and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.





Management
believes the following critical accounting policies, among others, will affect
its more significant judgments and estimates used in the preparation of our
Financial Statements.





Inventory.Parts and supplies inventories are stated at the lower of cost or market.
Cost is determined using the standard cost method which approximates actual
cost. Work-in-process and finished goods are stated at the lower of the
accumulated manufacturing costs or market.We
reduce the stated value of our inventory for obsolescence or impairment in an
amount equal to the difference between the cost of the inventory and the
estimated market value, based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are less favorable than
those projected by management, additional reductions in stated value may be
required.





Income Taxes.In determining the carrying value of our net deferred tax assets, we must
assess the likelihood of sufficient future taxable income in certain tax
jurisdictions, based on estimates and assumptions, to realize the benefit of
these assets. If these estimates and assumptions change in the future, we may
record a reduction in the valuation allowance, resulting in an income tax
benefit in our Statements of Operations. Management evaluates the realizability
of the deferred tax assets and assesses the valuation allowance
quarterly.





12


Effective
January 1, 2007, we adopted the provisions of Financial Accounting Standards
Board (“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109. The implementation
of FIN 48 had no impact on our financial statements.





We are
primarily subject to U.S. federal and state income tax. Tax years subsequent to
December 31, 2003 remain open to examination by U.S. federal and state tax
authorities. In addition, our policy is to recognize interest and penalties
related to income tax matters in income tax expense. As of  March 31,
2009, we had no accruals for interest or penalties related to income tax
matters.





Amortization and
Impairment of Long Lived Assets.Long lived assets, such as property,
equipment and intangible assets are recorded at historical cost. We amortize our
intangible assets using the straight-line method over their estimated useful
lives, usually two to five years. We review intangible assets subject to
amortization periodically to determine if any adverse conditions exist or a
change in circumstances has occurred that would indicate impairment or a change
in the remaining useful life of the applicable asset. Conditions that would
indicate impairment and trigger a more frequent impairment assessment include,
but are not limited to a significant adverse change in the legal factors or
business climate that could affect the value of an asset, or an adverse action
or assessment by a regulator. If the carrying amount of an asset exceeds its
estimated fair value, an impairment charge is recognized for the amount by which
the carrying amount exceeds the estimated fair value of the asset. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less
the estimated costs to sell. In addition, depreciation of the asset ceases.
During the three months ended March 31, 2009 and 2008, no impairment of
long-lived assets was recorded.





Revenue
Recognition. Our revenues are derived from the sale of surgical
visualization technology products to end users, distributors and original
equipment manufacturers. Revenue from the sale of products is recognized when
evidence of an arrangement exists, the product has been shipped, the selling
price is fixed or determinable,  collection is reasonably assured and
when both title and risk of loss transfer to the customer, provided that no
significant obligations remain. If installation is included as part of the
contract, revenue is not recognized until installation has occurred, or until
any remaining installation obligation is deemed to be perfunctory. Shipping and
handling costs are included in cost of sales.





For the
sale of products and services as part of a multiple-element arrangement, we
allocate revenue from multiple-element arrangements to the elements based on the
relative fair value of each element. For sales of extended warranties with a
separate contract price, Viking defers revenue equal to the separately stated
price. Revenue associated with undelivered elements is deferred and recorded
when delivery occurs.





Stock-Based
Compensation. On January 1, 2006, we adopted Statement of Financial
Accounting Standards (“SFAS”) No.123 (Revised 2004), “Share Based Payment,”
(“SFAS 123R”), using the modified prospective method. In accordance with SFAS
123R, which requires the measurement and recognition of compensation expense for
all share-based payment awards to employees and directors based on estimated
fair values. The Company uses the Black-Scholes option valuation model to
estimate the fair value of its stock options at the date of grant. The
Black-Scholes option valuation model requires the input of subjective
assumptions to calculate the value of stock options. The Company uses historical
data among other information to estimate the expected price volatility, the
expected annual dividend, the expected option life and the expected forfeiture
rate.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item.





ITEM
4T. CONTROLS AND PROCEDURES




Limitations
on the Effectiveness of Controls





We seek
to improve and strengthen our control processes to ensure that all of our
controls and procedures are adequate and effective. We believe that a control
system, no matter how well designed and operated, can only provide reasonable,
not absolute, assurance that the objectives of the controls system are met. In
reaching a reasonable level of assurance, management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. In addition, the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, a control may
become inadequate because of changes in conditions, or the degree of compliance
with policies or procedures may deteriorate. No evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company will be detected.  As set forth below, our Chief
Executive Officer and our Executive Vice President and Chief Financial Officer
have concluded, based on their evaluation as of the end of the period covered by
this report, that our disclosure controls and procedures were sufficiently
effective to provide reasonable assurance that the objectives of our disclosure
control system were met.





13


Evaluation
of Effectiveness of Disclosure Controls and Procedures





Our
management evaluated, with the participation of our principal executive officer
and our principal financial officer, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end
of the period covered by this quarterly report on Form 10-Q. Based on that
evaluation, our principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures as of March 31, 2009 are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Exchange Act (i) are recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms, and (ii)
are accumulated and communicated to our management, including our principal
executive officer and our principal financial officer, as appropriate, to allow
timely decisions regarding required reasonable assurance that such information
is accumulated and communicated to our management. Our disclosure controls and
procedures are designed to provide reasonable assurance that such information is
accumulated and communicated to our management. Our disclosure controls and
procedures include components of our internal control over financial reporting.
Management's assessment of the effectiveness of our internal control over
financial reporting is expressed at the level of reasonable assurance that the
control system, no matter how well designed and operated, can provide only
reasonable, but not absolute, assurance that the control system's objectives
will be met.




Changes
in Internal Control over Financial Reporting





There
were no changes in our internal controls over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules
13a-15 or 15d-15 that occurred during the last quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.





14


PART II - OTHER
INFORMATION





ITEM
1. LEGAL PROCEEDINGS.





From time
to time, we may become involved in various lawsuits and legal proceedings that
arise in the ordinary course of business. We are currently not aware of, nor do
we have any knowledge of, any such legal proceedings or claims against us or our
officer and directors in their capacity as such that we believe will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.





ITEM
1A. RISK FACTORS.





Forward
Looking Statements




This
interim report on Form 10-Q contains and incorporates by reference certain
“forward-looking statements” with respect to results of our operations and
businesses. All statements, other than statements of historical facts, included
in this report on Form 10-Q, including those regarding market trends, our
financial position, business strategy, projected costs, and plans and objectives
of management for future operations, are forward-looking statements. In general,
such statements are identified by the use of forward- looking words or phrases
including, but not limited to, “intended,” “will,” “should,” “may,” “expects,”
“expected,” “anticipates,” and “anticipated” or the negative thereof or
variations thereon or similar terminology. These forward-looking statements are
based on our current expectations. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to be correct and our actual results
could differ materially. These forward-looking statements represent our judgment
as of the date of this Form 10-Q. We disclaim, however, any intent or obligation
to update our forward-looking statements, except as required by
law.





Risks
Related to our Business





Our
Independent Auditors have expressed substantial doubt about our ability to
continue as a going concern.





The
report dated April 15, 2009 from our independent registered public
accounting firm, Squar, Milner, Peterson, Miranda & Williamson, LLP, on our
financial statements for the year ended December 31, 2008 included a going
concern explanatory paragraph in which they stated that the financial statements
were prepared assuming that we would continue as a going concern and that there
was substantial doubt regarding the Company’s ability to continue as a going
concern.  Our ability to continue as a going concern is an issue raised as
a result of our significant operating losses and negative operating cash
flows.  During the three months ended March 31, 2009, we incurred a
net loss of $290,512.  During the years ended December 31, 2008
and 2007, we incurred net losses of $5,752,057 and $923,290, respectively, and
we incurred negative cash flows from operating activities of $2,615,399 and
$6,792,845, respectively.  We will need to generate significant
revenue in order to achieve profitability and we may never become
profitable.  The going concern explanatory paragraph in the
independent auditor's report emphasizes the uncertainty related to our business
as well as the level of risk associated with an investment in our common
stock.





We
require additional financing and our inability to raise additional capital on
acceptable terms in the future may have a material adverse effect on our
business and financial condition.





We
believe that it is likely that we will need to seek a business combination or
additional financing in order to fund our operations and carry out our business
plan for the next twelve months. The overall weakening of the economy and
increased financial instability of many borrowers has resulted in a general
tightening of capital availability.  Many lending and investing
institutions that have traditionally been sources of capital have experienced
significant losses and a lack of liquidity. These conditions may adversely
impact our ability to raise capital. There can be no assurance that a business
combination or such financing will be available on acceptable terms, or at all.
We do not have any arrangements with any bank or financial institution to
provide additional financing and there can be no assurance that any such
arrangement, if required or otherwise sought, would be available on terms deemed
to be commercially acceptable and in our best interests. Also, if we raise
additional funds by selling equity or equity-based securities, the percentage
ownership of our existing stockholders will be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of our common stock. Any inability to obtain additional cash as needed
could have a material adverse effect on our financial position, results of
operations and ability to continue operations.





As part
of managing our business, we frequently forecast our future cash flow and cash
position.  Such projections include assumptions regarding fulfillment
of existing orders, receipt and fulfillment of future orders and ultimately the
receipt of cash.  These forecasts also include assumptions regarding
the timing of payments related to existing and future liabilities and inventory
procurement.   If forecasted orders do not materialize or
existing orders were cancelled or reduced, this could have a material adverse
impact on our projected cash position and our ability to continue our
operations.





15


The
recent deterioration of the economy and credit markets may adversely affect our
future results of operations.





Our
operations and performance depend to some degree on general economic conditions
and their impact on our customers’ finances and purchase
decisions.  As a result of recent economic events, potential customers
may elect to defer purchases of capital equipment items, such as the products we
manufacture and supply.  Additionally, the credit markets and the
financial services industry have been experiencing a period of upheaval
characterized by the bankruptcy, failure, collapse or sale of various financial
institutions and an unprecedented level of intervention from the United States
government. While the ultimate outcome of these events cannot be predicted, it
may have a material adverse effect on our customers’ ability to fund their
operations thus adversely impacting their ability to purchase our products or to
pay for our products on a timely basis, if at all.  These and other
economic factors could have a material adverse effect on demand for our
products, the collection of payments for our products and on our financial
condition and operating results.





We
will likely face significant competition which could adversely affect our
revenues, results of operations and financial condition.





The
market for medical products and services is highly competitive and new offerings
and technologies are becoming available regularly.  Many of our competitors
are substantially larger and more experienced than we are.  In
addition, they have longer operating histories and have materially greater
financial and other resources than we do.  If we cannot compete in the
marketplace, we may have difficulty selling our products and generating
revenues.  Additionally, competition may drive down the prices of our
products, which could adversely affect our cost of goods sold and our
profitability, if any.  We cannot guarantee that we will compete
successfully against our potential competitors.





We
depend upon our executive officers and key personnel.





Our
performance depends substantially on the performance of our executive officers
and other key personnel.  Our future success will depend to a large
extent on retaining our employees and our ability to attract, train, retain and
motivate sufficient qualified employees to fill vacancies created by attrition
or expansion of our operations.  The loss of the services of any of
our executive officers or key personnel could have a material adverse effect on
our business, revenues, and results of operations or financial
condition.





Competition
for talented personnel is intense, and we may not be able to continue to
attract, train, retain or motivate other highly qualified technical and
managerial personnel in the future.   In addition, market
conditions may require us to pay higher compensation to qualified management and
technical personnel than we currently anticipate.  Any inability to
attract and retain qualified management and technical personnel in the future
could have a material adverse effect on our business, prospects, financial
condition, and/or results of operations.





We
rely on a small number of customers and cannot be certain they will consistently
purchase our products in the future.





Sales to
individual customers exceeding 10% or more of revenues in the three months ended
March 31, 2009 were to three customers who accounted for 25%, 20% and 16% of
revenues, respectively. Sales to individual customers exceeding 10% or more of
revenues in the year ended December 31, 2008 were to three customers who
accounted for 30%, 19% and 11% of revenues, respectively.  No other
customer accounted for more than 10% of our revenues during those
periods.  In the future, a small number of customers may continue to
represent a significant portion of our total revenues in any given period. We
cannot be certain that such customers will consistently purchase our products at
any particular rate over any subsequent period.  A loss of any of these
customers could adversely affect our financial performance.





We are subject to significant
domestic and international regulations and may not be able to obtain necessary
regulatory clearances to sell our products.





The
manufacture and sale of medical devices intended for commercial distribution are
subject to extensive governmental regulation.  Our failure to comply with
regulatory requirements would jeopardize our ability to market our
products.  Noncompliance with applicable requirements can result in failure
of the regulatory agency to grant pre-market clearance or approval for devices,
withdrawal or suspension of approval, total or partial suspension of production,
fines, injunctions, civil penalties, refunds, recall or seizure of products and
criminal prosecution. Medical devices are regulated in the United States
primarily by the FDA and, to a lesser extent, by state agencies.  Sales of
medical device products outside the United States are subject to foreign
regulatory requirements that vary from country to country.  Generally,
medical devices require pre-market clearance or pre-market approval prior to
commercial distribution.  A determination that information available on the
medical device is not sufficient to grant the needed clearance or approval will
delay market introduction of the product.  In addition, material changes or
modifications to, and changes in intended use of, medical devices also are
subject to FDA review and clearance or approval.  The FDA regulates the
research, testing, manufacture, safety, effectiveness, labeling, storage, record
keeping, promotion and distribution of medical devices in the United States and
the export of unapproved medical devices from the United States to other
countries.  The time required to obtain approvals required by foreign
countries may be longer or shorter than that required for FDA clearance, and
requirements for licensing may differ from FDA requirements.  The current
regulatory environment in Europe for medical devices differs significantly from
that in the United States.




16


We
must be able to adapt to rapidly changing technology trends and evolving
industry standards or we risk our products becoming obsolete.





The
medical device market in which we compete is characterized by intensive
development efforts and rapidly advancing technology.  Our future success
will depend, in large part, upon our ability to anticipate and keep pace with
advancing technology and competing innovations.  We may not be successful
in identifying, developing and marketing new products or enhancing our existing
products. We believe that a number of large companies, with significantly
greater financial, manufacturing, marketing, distribution and technical
resources and experience than ours, are focusing on the development of
visualization products for minimally invasive surgery.




Our operating results may be
adversely affected by the level of reimbursements for surgical procedures using
our products.





The level
of payments for the surgical procedures, in which our products are involved,
either by Medicare or private insurance companies may have a significant impact
on future operating results.  We could be adversely affected by changes in
payment policies of government or private health care payers, particularly to
the extent any such changes affect payment for the procedure in which our
products are intended to be used.  It is a continuing trend in United
States health care for such payments to be under continual scrutiny and downward
pressure.  We believe that reimbursement in the future will be subject to
increased restrictions, both in the United States and in foreign markets and
that the overall escalating cost of medical products and services has led to and
will continue to lead to increased pressures on the health care industry, both
foreign and domestic, to reduce the cost of products and services, including
products which we offer.





We expect
that our products typically will be used by hospitals and surgical centers,
which bill various third-party payers, such as governmental programs and private
insurance plans, for the health care services provided to their patients. 
Third-party payers carefully review and increasingly challenge the prices
charged for medical products and services or negotiate a flat rate fee in
advance.  Payment rates from private companies also vary depending on the
procedure performed, the third-party payer, the insurance plan and other
factors.  Medicare compensates hospitals at a predetermined fixed amount
for the costs associated with an in-patient hospitalization based on the
patient’s discharge diagnosis and compensates physicians at a pre-determined
fixed amount based on the procedure performed, regardless of the actual costs
incurred by the hospital or physician in furnishing the care and unrelated to
the specific devices or systems used in that procedure.  Medicare and other
third-party payers are increasingly scrutinizing whether to cover new products
and the level of payment for new procedures.  The flat fee reimbursement
trend is causing hospitals to control costs strictly in the context of a managed
care system in which health care providers contract to provide comprehensive
health care for a fixed cost per person.  We are unable to predict what
changes will be made in the reimbursement methods utilized by such third-party
payers.





If we
obtain the necessary foreign regulatory registrations or approvals, market
acceptance of our products in international markets would be dependent, in part,
upon the acceptance by the prevailing health care financing system in each
country.  Health care financing systems in international markets vary
significantly by country and include both government sponsored health care
programs and private insurance.  We cannot assure you that these financing
systems will endorse the use of our products.





We may be subject to product
liability claims and have limited insurance coverage.





By
engaging in the medical devices business, we will face an inherent business
risk of exposure to product liability claims in the event that the use of our
products results in personal injury or death.  Also, in the event that any
of our products proves to be defective, we may be required to recall or redesign
such products. We will need to maintain adequate product liability
insurance coverage.  If we are able to maintain insurance, of which there
can be no assurance, our coverage limits may not be adequate to protect us from
any liabilities we might incur in connection with the development, manufacture
and sale of our products.  Product liability insurance is expensive and in
the future may not be available to us on acceptable terms, if at all.  A
successful product liability claim or series of claims brought against us in
excess of our insurance coverage or a product recall would negatively impact our
business.





Risks
Related to our Stock





Investors
who purchase shares of our common stock should be aware of the possibility of a
total loss of their investment.





An
investment in our common stock involves a substantial degree of risk.
 Before making an investment decision, you should give careful
consideration to the risk factors described in this section in addition to the
other information contained in this annual report.  The risk factors
described herein, however, may not reflect all of the risks associated with our
business or an investment in our common stock.  You should invest in our
Company only if you can afford to lose your entire investment.





17


Our
current management, along with a select few investors, possess a majority of our
common stock and they may be able to control our Company
indefinitely.





A few of
our stockholders have significant control over our voting stock which may make
it difficult to complete some corporate transactions without their support and
may prevent a change in control.  As of March 31, 2009, our directors
and executive officers as a whole, may beneficially own approximately 18,612,916
shares or  43.6% of our outstanding common stock, and assuming that
the warrants and options (exercisable as of 60 days from March 31, 2009) were
exercised, may beneficially own approximately 35,132,832 shares
or  59.3% of our outstanding common stock.  Certain of our
officers and directors disclaim beneficial ownership of certain shares included
in the description above. As of March 31, 2009, all of the warrants and options
included in the above calculation were at exercise prices above the quoted
market price of our common stock.





The
above-described significant stockholders may have considerable influence over
the outcome of all matters submitted to our stockholders for approval, including
the election of directors. In addition, this ownership could discourage the
acquisition of our common stock by potential investors and could have an
anti-takeover effect, possibly depressing the trading price of our common
stock.




Penny stock” rules may make
buying or selling our securities difficult, which may make our stock less liquid
and make it harder for investors to buy and sell our
securities.





Our
common stock currently trades on the Over-the-Counter Bulletin
Board.  If the market price per share of our common stock is less than
$5.00, the shares may be “penny stocks” as defined in the Securities Exchange
Act of 1934, as amended, referred to as the Exchange Act.  As a
result, an investor may find it more difficult to dispose of or obtain accurate
quotations as to the price of these securities.  In addition, “penny
stock” rules adopted by the SEC under the Exchange Act subject the sale of these
securities to regulations which impose sales practice requirements on
broker-dealers.  For example, broker-dealers selling penny stocks
must, prior to effecting the transaction, provide their customers with a
document that discloses the risks of investing in penny stocks.





Furthermore,
if the person purchasing the securities is someone other than an accredited
investor or an established customer of the broker-dealer, the broker-dealer must
also approve the potential customer’s account by obtaining information
concerning the customer’s financial situation, investment experience and
investment objectives.  The broker-dealer must also make a
determination whether the customer has sufficient knowledge and experience in
financial matters to be reasonably expected to be capable of evaluating the risk
of transactions in penny stocks. Accordingly, the SEC’s rules may limit the
number of potential purchasers of shares of our common
stock.  Moreover, various state securities laws impose restrictions on
transferring “penny stocks,” and, as a result, investors in our securities may
have their ability to sell their securities impaired.





If
an active, liquid trading market for our common stock does not develop, you may
not be able to sell your shares quickly or at or above the price you paid for
it.




Although
our common stock currently trades on the Over-the-Counter Bulletin Board, an
active and liquid trading market for our common stock has not yet and may not
ever develop or be sustained.  You may not be able to sell your shares
quickly or at or above the price you paid for our stock if trading in our stock
is not active.





We
do not expect to pay dividends in the foreseeable future.




We do not
anticipate paying cash dividends on our common stock in the foreseeable future.
Any payment of cash dividends will depend on our financial condition, results of
operations, capital requirements and other factors and will be at the discretion
of our board of directors.





ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.




We did
not sell any unregistered securities during the quarter ended March 31,
2009.





ITEM
3. DEFAULTS UPON SENIOR SECURITIES.





As
of  March 31, 2009, we are not in default with respect to any
indebtedness.





ITEM
4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.





We did
not submit any matters to a vote of security holders during the quarter ended
March 31, 2009.





ITEM 5. OTHER
INFORMATION.





None.


18


ITEM
6. EXHIBITS





ExhibitNumber
            Exhibit3.1
            Certificate
      of Incorporation dated June 8, 2006 (included as Exhibit 3.1 to the
      Registrant's Annual Report on Form 10-KSB for the fiscal year ended
      December 31, 2007, and incorporated herein by reference).3.2
            Bylaws
      (included as Exhibit 3.3 to the Registrant's Annual Report on Form 10-KSB
      for the fiscal year ended December 31, 2007, and incorporated herein by
      reference).4.1
            Certificate
      of Preferences, Rights and Limitations of Series B Variable Dividend
      Convertible Preferred Stock (included as Exhibit 4.01 to the Form 8-K
      filed May 25, 2006, and incorporated herein by reference).10.1
            Stock
      Incentive Plan, dated March 31, 2004 (included as Exhibit 10.1 to the Form
      8-K filed April 1, 2004, and incorporated herein by
      reference).10.2
            2004
      Non-Employee Director Stock Ownership Plan dated December 29, 2005
      (included as Exhibit 10.2 to the Form 8-K filed April 1, 2004, and
      incorporated herein by reference).10.3
            Employment
      Agreement between the Company and John Kennedy, dated October 10, 2005
      (included as Exhibit 10.3 to the Form 8-K filed October 27, 2005, and
      incorporated herein by reference).10.4
            Independent
      Sales Agent Agreement between the Company and Platinum Medical Inc., dated
      November 21, 2006 (included as Exhibit 10.17 to the Registrant's Annual
      Report on Form 10-KSB for the fiscal year ended December 31, 2006, and
      incorporated herein by reference).10.5
            Lease
      between the Company and Robert F. Tambone as Trustee of MAT Realty Trust,
      dated September 23, 2004 (included as Exhibit 10.1 to the Form 8-K filed
      October 1, 2004, and incorporated herein by reference).10.6
            First
      Amendment to Lease between the Company and Robert F. Tambone as Trustee of
      MAT Realty Trust, dated February 5, 2007 (included as exhibit 10.18 to the
      Registrant's Annual Report on Form 10-KSB for the fiscal year ended
      December 31, 2006, and incorporated herein by reference).10.7
            Securities
      Purchase Agreement between the Company and various investors, dated
      February 23, 2007 (included as Exhibit 10.1 to the Form 8-K filed February
      27, 2007, and incorporated herein by reference).10.8
            Amendment
      to Securities Purchase Agreement between the Company and various
      investors, dated July 19, 2007 (included as Exhibit 10.11 to the Form 8-K
      filed August 2, 2007, and incorporated herein by reference).10.9
            Securities
      Purchase Agreement between the Company and various investors, dated July
      31, 2007 (included as Exhibit 10.1 to the Form 8-K filed August 2, 2007,
      and incorporated herein by reference).10.10
            Registration
      Rights Agreement between the Company and various investors, dated February
      23, 2007 (included as Exhibit 10.1 to the Form 8-K filed February 27,
      2007, and incorporated herein by reference).10.11
            Amendment
      No. 1 to Registration Rights Agreement between the Company and various
      investors, dated July 19, 2007 (included as Exhibit 10.7 to the Form 8-K
      filed August 2, 2007, and incorporated herein by reference).10.12
            Common
      Stock Purchase Warrant, dated February 23, 2007 (included as Exhibit 10.4
      to the Form 8-K filed February 27, 2007, and incorporated herein by
      reference).10.13
            8%
      Secured Convertible Debenture, dated July 31, 2007 (included as Exhibit
      10.2 to the Form 8-K filed August 2, 2007, and incorporated herein by
      reference).





19





10.14
            Consent,
      Waiver and Amendment Agreement, dated February 23, 2007 (included as
      Exhibit 10.6 to the Form 8-K filed February 27, 2007, and incorporated
      herein by reference).10.15
            Revised
      Consent, Waiver and Amendment Agreement, dated July 22, 2007 (included as
      Exhibit 10.10 to the Form 8-K filed August 2, 2007, and incorporate herein
      by reference).10.16
            Consent,
      Waiver and Amendment Agreement, dated July 19, 2007 (included as Exhibit
      10.6 to the Form 8-K filed August 2, 2007, and incorporated herein by
      reference).10.17
            Security
      Agreement between the Company and various investors, dated February 23,
      2007 (included as Exhibit 10.5 to the Form 8-K filed February 27, 2007,
      and incorporated herein by reference).10.18
            Amendment
      No. 1 to Security Agreement between the Company and various investors,
      dated July 19, 2007 (included as Exhibit 10.2 to the Form 8-K filed August
      2, 2007, and incorporated herein by reference).10.19
            Recapitalization
      Agreement between the Company and Securityholders, dated December 31, 2007
      (included as exhibit 99.1 to the Form 8-K filed January 7, 2008, and
      incorporated herein by reference).10.20
            Securities
      Purchase Agreement between the Company and various investors, dated
      January 4, 2008 (included as Exhibit 99.2 to the Form 8-K filed January 7,
      2008, and incorporated herein by reference).10.21
            Executive
      Employment Agreement between the Company and William C. Bopp, dated
      January 4, 2008 (included as Exhibit 99.3 to the Form 8-K filed January 7,
      2008, and incorporated herein by reference).10.22
            Amendment
      to Executive Employment Agreement between the Company and William C. Bopp,
      dated February 27, 2008 (included as Exhibit 99.2 to the Form 8-K filed
      February 29, 2008, and incorporated herein by reference).31.1
            Certification
      of Principal Executive Officer in accordance with 18 U.S.C. Section 1350,
      as adopted by Section 302 of the Sarbanes- Oxley Act of
    200231.2
            Certification
      of Principal Financial Officer in accordance with 18 U.S.C. Section 1350,
      as adopted by Section 302 of the Sarbanes-Oxley Act of
  200232.1
            Certification
      of Principal Executive Officer in accordance with 18 U.S.C. Section 1350,
      as adopted by Section 906 of the Sarbanes-Oxley Act of
  200232.2
            Certification
      of Principal Financial Officer in accordance with 18 U.S.C. Section 1350,
      as adopted by Section 906 of the Sarbanes-Oxley Act of
  2002




20





SIGNATURE





Pursuant
to the requirements of the Exchange Act of 1934, the registrant has caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.







Dated:
      May 14, 2009
            VIKING
      SYSTEMS, INC.By:
            /s/ William C. BoppChief
      Executive Officer
              (Principal
      Executive Officer)By:
            /s/ Robert MathewsExecutive
      Vice President and
              Chief
      Financial Officer
              (Principal
      Financial Officer and Principal Accounting
  Officer)